Lecture 22-23 (Partnerships)

Question 1

Differences between partnership accounting and company accounting.

Answer 1

No share capital or retained earnings.
Instead have capital and current accounts.
Need to think about how to share profits.
Companies Act, accounting standards etc. not enforceable, but best practice.

Question 2

CAPITAL

Answer 2

The amount that each partner contributes to the business. Does not need to be equal.

Question 3

How are partners rewarded for having larger amounts of capital in the business.

Answer 3

Normal to provide interest on capital.

Question 4

Partners can withdraw cash from the business, but it is in the best interests of the partnership if cash withdrawals are:

Answer 4

As little as possible
A late as possible
Therefore, normal to charge interest on drawings.

Question 5

CAPITAL ACCOUNTS

Answer 5

One for each partner

Record fixed capital contributions and withdrawals.

Question 6

CURRENT ACCOUNTS

Answer 6

One for each partner

Record share of profits/losses, drawings, salary payments, etc.

Question 7

Double entries for the set up of a partnership.

Answer 7

Dr Bank
Cr Capital (Partner A)
Cr Capital (Partner B)

Question 8

Methods of profit sharing.

Answer 8

Interest on capital
Interest on drawings
Partners' salaries
Share of residue (what is left after dealing with 1-3)
Go in income statement.

Question 9

Double entries for profit sharing.

Answer 9

Dr P&L appropriation account
Cr Partner current accounts (individually)
If amounts are actually paid (e.g. salary) then:
Dr Current a/c
Cr Bank

Question 10

Where do capital and current account go?

Answer 10

SoFP

Sum of both partners

Question 11

PARTNERSHIP AGREEMENT

Answer 11

Does not need to be written- but advisable.
Agreement may be implied by conduct.
If a dispute arises, must look at courts to decide.

Question 12

What happens if no partnership agreement?

Answer 12

Partnership Act states that in this case:

• Profits and losses to be shared equally.
• No interest allowed on capital.
• No interest to be charged on drawings.
• Salaries are not allowed.
• If partners put capital in to the business in excess of the amount hey agreed to subscribe, they are entitled to interest at a rate of 5% per annum.

Question 13

What happens if there are changes in membership?

Answer 13

If ownership changes this creates a new business- partnership not a separate legal entity.

Result- upon change partners due their share of accumulated profits and losses.

Need to think about current value of assets, not just book value.
When there is a change in ownership goodwill must be valued to avoid unfair gains and losses between partners.

Question 14

GOODWILL

Answer 14

What is value of business as a whole?
E.g. client list, skills & knowledge, relationships built up with suppliers, etc.
Effectively try to value the reputation of the business.

Not normally entered into accounts.
Unless agreed otherwise, partners share goodwill in same proportion as profit sharing agreement.

Question 15

Double entries for someone leaving partnership.

Answer 15

Assets revalued, goodwill written off. 
E.g.
Dr L&B (increase in value)
Dr P&M (increase in value)
Dr Goodwill (remove)
Cr Inventory (decrease in value)
Cr Receivables (decrease in value)
Cr Revaluations a/c (total revaluation amount)

THEN SHARE BETWEEN PARTNERS

Dr Revaluation a/c
Cr Capital a/c A
Cr Capital a/c B
Cr Capital a/c C

If A is leaving, he is entitled to his contributed capital plus the increase/decrease in revaluation amount.

Dr Capital A
Dr Current A
Cr Bank

Have to remove goodwill (share between remaining partners)

Dr Capital
Cr Goodwill

Question 16

What are the steps of dissolving a partnership?

Answer 16

1. Assets disposed of
2. Settle all debts, other than amounts due to partners
3. Repay any partner loans
4. Settle amounts on partner capital and current accounts

Question 17

Double entries for dissolving a partnership.

Answer 17

1. Use book value
   Dr Realisations
   Cr Assets
2. Cash from sale of assets
   Dr Bank
   Cr Realisations
3. Settle liabilities
   Dr Liabilities
   Cr Bank
4. Expenses of realisation
   Dr Realisations a/c
   Cr Bank
5. Assets taken over by partners at valuation
   Dr Capital
   Cr Realisations a/c
6. Profit on realisation
   Dr Realisations a/c
   Cr Capital a/c

Question 18

What happens if one of the partners has a debit balance on their capital account on wind up?

Answer 18

If possible, the partner should pay money in to the partnership to clear the debt.
If they cannot pay, they will be liable for the debt.

Question 19

LIMITED LIABILITY PARTNERSHIP (LLP)

Answer 19

Limited Liability Partnership Act 2000 allows a new type of business.
LLP is a separate legal entity.
Apart from some exemptions, members have limited liability to the amount of their capital.
LLP must file accounts with Companies House and have audit.
Member agreement essential.
No limit to number of members.

Question 20

Exemptions to limited liability of LLP members.

Answer 20

• Member personally at fault in giving rise to a cause of action, they may have unlimited personal liability.
• If LLP insolvent, members may be required to repay all property withdrawn in the last two years.